Chapter 21: Features of oligopoly, Collusive and Non collusive

Oligopoly

Diti Goswami

NMIMS Bangalore

November 10, 2022

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Features of Oligipoly

Few firms dominate the market-high concentration ration

Differentiated Products-price makers
High barriers to entry exit
Interdependence-price rigidity
Non-price competition
Profit maximization not sole objective

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Oligopoly

Examples: auto industry, cable television, and commercial air travel

Classic Example: Boeing-Airbus for large passenger aircraft, Coca-Cola or
Pepsi (creating a brand name and marketing effort)

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Oligopolistic firms are like cats in a bag

They can either scratch each other to pieces or cuddle up and get
comfortable with one another
If oligopolists compete hard, they may end up acting very much like
perfect competitors, driving down costs and leading to zero profits for all
If oligopolists collude with each other, they may effectively act like a
monopoly and succeed in pushing up prices and earning consistently high
levels of profit.
Oligopolies are typically characterized by mutual interdependence where
various decisions such as output, price, advertising, and so on, depend on the
decisions of the other firms

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Why Do Oligopolies Exist?

A combination of the barriers to entry that create monopolies and the

product differentiation that characterizes monopolistic competition can
create the setting for an oligopoly
For example, when a government grants a patent for an invention to one
firm, it may create a monopoly. When the government grants patents to,
for example, three different pharmaceutical companies, those three firms
may become an oligopoly.

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Diti Goswami (NMIMS) NMIMS Bangalore November 10, 2022 5/8
Collusion or Competition?

When oligopoly firms in a certain market decide what quantity to

produce and what price to charge, they face a temptation to act as if
they were a monopoly
By acting together, oligopolistic firms can hold down industry output,
charge a higher price, and divide up the profit among themselves
When firms act together in this way to reduce output and keep prices
high, it is called collusion
A group of firms that have a formal agreement to collude to produce the
monopoly output and sell at the monopoly price is called a cartel

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Collusion versus cartels: How can I tell which is which?

It is illegal for firms to collude since collusion is anti-competitive behavior,

which is a violation of antitrust law.
The problem of enforcement is finding hard evidence of collusion
Cartels are formal agreements to collude. Because cartel agreements provide
evidence of collusion, they are rare countries
Instead, most collusion is tacit, where firms implicitly reach an
understanding that competition is bad for profits

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 Acknowledgement

Thank you!

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